Corporate governance and its development

For developing economies, corporate governance helps to achieve stable economic growth by means of effective management of corporations and, to some extent, governments (Bushman and Smith 2001). Countries which already possess advanced corporate governance standards strive to strengthen adherence to them. It goes without saying that the catalyst of the process was the corporate and financial collapse of Enron. The crash of this company illustrated that even a company with good financial results might go bankrupt if it lacked solid corporate governance mechanisms guaranteeing trustworthy work of non-executive directors, auditors and the board of directors. Following the scandal, the regulators all over the world developed a number of policies to prevent further failures (Papers4you.com, 2006). Among the most influential documents are the Sarbanes-Oxley Act of 2002 and the Higgs Report of 2003.
So what is corporate governance? There exist numerous definitions of corporate governance, though most of them can be divided into the so called “narrow” and “broad” views (Shankman 1999). The former emphasizes the role of corporate governance in improvement of the relationship between an enterprise and its shareholders. In other words, the main stress here is on resolving the agency problem. On the other hand, the latter and more modern approach states that corporate governance facilitates relationships not only between a company and its shareholders, but also between different stakeholders in the company, including employees, customers, suppliers, bondholders and the government. Therefore, corporate governance becomes important for the society as a whole (Papers4you.com, 2006). There is growing evidence that recent changes in corporate governance make its practical realization conforming to the second view.

It is interesting to look at the most pronounced tendencies in corporate governance development. First, it is increasing institutional investor activism. Big asset management funds, pension funds and other institutional investors now not only passively wait for return on their invested funds, but discharge accountability, for instance, when it comes to directors’ remuneration. Second, there is some evidence of harmonization in corporate governance standards. This process is led by globalization of international trade and financial activities. As a result, many countries adopt the OECD (1999) principles of corporate governance, which predominantly represent an Anglo-American style of governance. However, due to significant political, legal, religious and other differences between various countries it is difficult to expect a high degree of convergence. Third, the scope of corporate governance goals has also increase. Nowadays, managers of corporations make decisions taking into account corporate social responsibility. In other words, social and environmental issues now increasingly determine how well the company performs (Alexander and Buchholz 1978). To sum up, corporate governance in the 21st century is the system of checks and balances which ensures that business entities act in a socially responsible way in all their endeavors, while maximizing shareholders’ value. 

References

Alexander, G. J. and R. A. Buchholz (1978). "Corporate social responsibility and stock market performance." Academy of Management Journal 21(3): 479–486.

Bushman, R. M. and A. J. Smith (2001). "Financial accounting information and corporate governance." Journal of Accounting and Economics 32: 237–333.

Papers For You (2006) "C/F/119. Globalization and Corporate Governance", Available from http://www.coursework4you.co.uk/sprtfina23.htm [19/06/2006]

Shankman, N. A. (1999). "Reframing the debate between agency and stakeholder theories of the firm." Journal of Business Ethics 19: 319–334.